Christopher DelOrefice
Executive Vice President and Chief Financial Officer at Becton, Dickinson and Company
Thanks, Tom. Echoing Tom's comments, we delivered another quarter of strong performance in Q1, which demonstrates our consistent, reliable, durable growth profile in our BD2025 strategy, playing out as planned.
So first, beginning with our revenue performance. We exceeded our expectations for the quarter, delivering $4.6 billion in revenue with base business growth of 5.2% or 3% organic. We see underlying organic growth more at mid-single digits when adjusting for strategic product exits, the licensing fee comparison in life sciences and several COVID-driven comparisons. COVID-only testing revenues were $32 million, which as expected declined from $185 million last year. Total company base business growth was strong across BD Medical and BD Interventional with approximately 6% growth. Base revenue growth in BD Life Sciences of 3.3% reflects the comparison to licensing revenues that impacted growth by almost 400 basis points.
Base revenue growth was strong regionally as well with mid-single-digit growth in the U.S., EMEA and Asia Pacific. Revenues in China declined slightly, which reflects the impact of COVID restrictions, offset by strong performance from new product introductions in BDI and research solutions in BDB. For the full year, we continue to expect to deliver near double-digit growth in China. Our base business revenue performance continues to be supported by our durable core portfolio and an increasing contribution from the transformative solutions in our innovation pipeline and tuck-in acquisitions. We also continue to benefit from the organic contribution from acquisitions we anniversaried, which was about 30 basis points in the quarter.
Let me now provide some high-level insight into each segment's performance in the quarter. Further detail can be found in today's earnings announcement and presentation. BD Medical revenue totaled $2.2 billion in the quarter, growing 6.1%. BD Medical performance reflects strong growth in both Medication Management Solutions and Pharm Systems, which more than offset a decline in Medication Delivery Solutions. The decline in MDS of 1% was driven by COVID-related comparisons and the impact of recent COVID restrictions in China as well as planned strategic portfolio exits. We continue to see strong performance in Vascular Access Management outside the U.S. Double-digit growth of 15.5% in MMS was driven by strong demand for our Pharmacy Automation Solutions, including both Parata and ROWA. We've been very pleased with customer response and the performance of Parata. As expected, growth in MMS also reflects the comparison to higher dispensing installations and infusion set utilization in the prior year driven by COVID dynamics. We continue to have a very healthy backlog of customer orders for Pyxis and BD HealthSight, which reflects the strength of our connected medication management portfolio. And despite strong growth of 18% in Q1 of last year, Pharm Systems delivered another quarter of double-digit growth of 10.6%, driven by continued penetration in the high-growth biologic and vaccine markets.
BD Life Sciences revenue totaled $1.3 billion in the quarter. The decline of 7.3% year-over-year is due to the expected lower COVID-only testing revenues. Life Sciences base revenues grew over 7%, excluding the licensing grow over, as previously discussed. Growth was driven by growth in Integrated Diagnostic Solutions base revenue of 1.3%, or 6.4% when excluding the licensing comparison. This strong underlying mid-single-digit growth was driven by BD Kiestra that is helping to address laboratory labor shortages through automation and informatics and continued leverage of our molecular testing menu across our expanded BD Max installed base. In addition, there was strong demand for our respiratory testing portfolio that was partly aided by the timing of orders.
High-single-digit growth of 9.2% in Biosciences reflects continued growth from new product launches combined with strong double-digit growth in research reagents, enabled by our differentiated content and dye strategy. We continue to see demand for our expanded suite of flow cytometry analyzers and sorters as researchers continue to do even higher parameter cellular analysis for cancer and other immune-related conditions.
BD Interventional revenues totaled $1.1 billion in the quarter, growing 5.6%. Growth was driven by surgery growth of 3.1%, which reflects strong performance in Advanced Repair and Reconstruction driven by continued strong market adoption of Phasix hernia resorbable scaffold and double-digit growth in Biosurgery, aided by the Tissuemed acquisition. Growth in surgery was tempered by planned strategic portfolio exits and an expected decline in BD ChloraPrep due to a tough comparison to the prior year as a result of dealer stocking.
Peripheral Intervention grew 10.8%, which reflects double-digit growth in PVD, driven by the Venovo relaunch, coupled with continued global penetration of Rotarex and the acquisition of Venclose, which addresses chronic venous insufficiency. Additionally, growth was strong in oncology, within Greater Asia due to an improved backlog situation associated with prior year supplier constraints.
Urology growth of 1.8% reflects double-digit growth in our PureWick chronic incontinence solutions and Endourology that benefited from reduced back order due to improved supplier performance. Offsetting this strong performance was a difficult comparison in Urological Drainage due to Surestep backorder release and distributor stocking in the prior year.
Now moving to our P&L. We reported Q1 adjusted diluted EPS of $2.98, which included gross margin of 54.7% and operating margin of 22.9% that were consistent with our expectations. While we are no longer providing a specific breakout of the impact to margins from COVID-only testing, you will recall the comparison to higher [Phonetic] testing in the prior year is weighted to the first half and as expected, is the driver of the decline in reported Q1 margins year-over-year.
Excluding the COVID impacts to margins in Q1 of both years, both gross and operating margins in our base business were up slightly year-over-year. The improvement in base margins was delivered despite around 350 basis points of outsized inflation that, as expected, was primarily driven by selling through inventory that included peak inflation impacts from FY '22, such as increases in certain raw materials noted earlier as well as the impact of labor inflation and elevated shipping. We were able to offset a large portion of this impact to [Phonetic] our simplification and inflation mitigation initiatives and the benefit from strategic portfolio exits of lower-margin products as planned. We expect the impact from inflation to moderate as we move through the year. Base margin performance also includes growing over the impact from licensing revenues in the prior year. As expected, we had favorable [Phonetic] FX that was recorded in inventory that benefited our GP as it flowed through sales.
R&D of 6.4% of sales reflects our innovation investments aligned to our strategy in support of our long-term growth outlook. Q1 reflects timing of project spend. We expect R&D to remain elevated in Q2 and normalize over the balance of the year to around our long-range target of 6%. Our tax rate in Q1 was lower than anticipated due to the timing of certain discrete items that were planned for during the year.
Regarding our cash and capital allocation, cash flows from operations totaled approximately $400 million in the quarter. Operating cash flow reflects an impact of approximately $300 million from higher inventory balances. The increase reflects the impact of inflation and our strategic investments in raw materials to optimize product delivery and meet customer demand. We've seen good progress in December and January on WIP [Phonetic] and finished goods rightsizing with January inventory dollars down sequentially from December.
We are working to moderate strategic raw material purchases as stability improves in select markets. However, we continue to make prudent trade-offs where necessary to ensure we support our customers while delivering strong results. Assuming continued stabilization of the macro environment and supply chain, we expect to continue to manage inventory levels down and by the end of the fiscal year have this be a positive source of cash and meaningful progress towards meeting our long-term cash conversion goals.
We paid down approximately $500 million in long-term debt in Q1 and ended the quarter with a cash balance of approximately $600 million and a net leverage ratio of 3 times. As the year progresses and we build cash, we can increase our capacity to deploy cash towards tuck-in M&A.
Moving to our guidance for fiscal '23. For your convenience, the detailed assumptions underlying our guidance can also be found in our presentation. Given our first quarter performance, we are confident in increasing our revenue and EPS guidance, given the strength of our base revenue growth, consistent execution of our margin goals and reflecting the latest FX rates.
Starting with revenues, I will provide some insights into some of our key guidance assumptions. First, we are well positioned for strong growth across our three segments, which are delivering at or above our initial expectations despite the impact of restrictions in China, and thus, we are increasing our base revenue guidance. On a currency-neutral basis, we now expect base revenues to grow 5.75% to 6.75%. This is an increase of 50 basis points from our prior guidance of 5.25% to 6.25% and is driven by our Q1 revenue outperformance and the confidence we have in our consistent durable growth profile.
Our base revenue guidance continues to include planned strategic portfolio exits that will enable increasing manufacturing efficiency and capacity and ensure the reliable supply of the products that matter most to our customers. We initiated these actions in Q1 and for the full year, continue to expect an impact to base revenue growth of approximately 100 basis points while being accretive to margin. Offsetting this revenue impact, we continue to expect a positive contribution of approximately 100 basis points from the full year benefit of our recent acquisitions with Parata being the predominant driver.
While we aren't providing segment-specific guidance, we are on track to deliver strong performance across our segments this fiscal year in line with our long-term planned commitments. We expect Medical segment growth to be above the total company range, which includes the acquisition of Parata, Life Sciences growth to be below given strong prior year comps and Interventional to be above the midpoint.
For COVID-only testing, we are now assuming about $50 million to $100 million in revenue versus our previous expectation of about $125 million to $175 million and is driven by reduced testing volumes and the continued shift in the market to combination testing for respiratory illness.
Regarding Alaris, we continue to only model shipments related to medical necessity in line with fiscal '22 demand. Regarding our assumptions on earnings, we continue to expect operating margins to improve by at least 100 basis points while absorbing the decline in COVID-only revenue, which has a higher margin profile. Despite the challenging macro environment persisting, our focused execution on driving profitable revenue growth, combined with our simplified programs, gives us the confidence that we will be able to continue to mitigate inflationary pressures and make meaningful progress to achieving operating margin levels of about 25% in fiscal year '25. We continue to expect over 80% of the improvement in operating margin to come from SSG&A, driven by internal cost containment and leverage. The balance is expected to come from slight improvement in gross margin and R&D as we normalize back closer to our target of 6% of sales.
Below operating income, our assumptions regarding interest, other and tax remain unchanged. We continue to expect adjusted EPS before the impact of currency to be around double-digit growth and within a range of approximately 9% to 11%. This includes absorbing about a 350-basis-point headwind from the anticipated decline in COVID-only testing, which is about 50 basis points more than we previously anticipated. As a result, this implies a very strong low-teens base earnings growth of approximately 12.5% to 14.5% compared to 12% to 14% previously anticipated.
Let me now walk you through the estimated impact from currency. As a reminder, we manage our business and provide guidance on an operational basis, but provide perspective on currency using current spot rates. Since our last call in November, the U.S. dollar weakened against all of our major currencies. Based on current spot rates, which assumes the euro at $1.08 for the remainder of the year, for illustrative purposes, currency is now estimated to be a headwind of approximately 200 basis points, or about $370 million to total company revenues on a full year basis, which is an improvement of approximately 250 basis points compared to our prior view.
The currency headwind to adjusted EPS growth has also declined significantly since our November earnings call. At current rates, currency would represent a total headwind of approximately 230 basis points to adjusted EPS growth compared to approximately 420 basis points previously. All in, including the estimated impact of currency, we are increasing our reported revenue guidance by approximately $500 million to a range of $19.1 billion to $19.3 billion compared to $18.6 billion to $18.8 billion previously and are raising our adjusted EPS guidance to be between $12.07 and $12.32, which is an increase of $0.22 at the midpoint compared to our prior guidance range of $11.85 to $12.10.
As we think of fiscal '23 phasing, there are various items to consider. We have outlined more detail in the accompanying presentation slides, but the following are key areas to note.
First, regarding margins. We expect Q2 operating margin to be similar to our FY '22 full year margin. This demonstrates our strong focus on profitable growth given the continued impact of inflation and the grow-over impact of our COVID-only testing revenue, both of which we expect to be most prominent in the first half of the year. As a reminder, COVID-only testing has a higher margin and reinvestment of COVID-only testing profit was weighted to the back half of the year. As the year progresses and we continue to benefit from our simplification and inflation mitigation programs, we anticipate margin expansion to be most prominent and to increase through the second half.
Second, regarding FX. At current spot rates, we expect the headwind to revenue and EPS will be over-indexed to the first half with about 90% of the full year impact to revenue and about 80% of the full year impact to EPS occurring in the first half. For the full year, we expect the FX drop-through to earnings to be in line with our BDX operating margin.
Lastly, a couple of timing items to note. We expect R&D as a percentage of sales to remain elevated in Q2 and normalize over the balance of the year to around our long-term target of 6%. Additionally, the midpoint of our full year effective tax rate guidance indicates an effective tax rate over 16% for the balance of the year, which is best to assume occurs evenly throughout the year as the exact timing of any other discrete items is hard to predict.
In closing, we are very pleased with our performance, which demonstrates our consistent, reliable, durable growth profile and our BD2025 strategy continuing to progress as planned. As we look forward and as reflected in our FY '23 guidance, we are well positioned for growth with excellent momentum in our base business.
With that, let me turn it back to Tom for a few additional comments.
